The%20Centre%20for%20Micro%20Finance%20A%20comprehensive%20approach%20of%20Microfinance

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The Centre for Micro FinanceA comprehensive
approach of Microfinance

• Karachi
• November 1st, 2006

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Agenda

• Microfinance in India an overview
• The Centre for Micro Finance
• Research Unit
• MFI Strategy Unit

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Microfinance who are the targeted clients?
Poor and vulnerable households economically at
the Bottom of the Pyramid
How can microfinance improve their lives?
4
Microfinance what is it?
whereas objectives are
Often perceived as

• Suite of financial services
• Thrift / savings
• Credit
• Insurance and Investments
• Transfer Payments and Remittances
• Group and individual lending
• Sustainable activity

• Micro-credit
• Group lending
• Social/charitable activity

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The challenge ahead demand vs. supply gap to
bridge
Supply
Demand

• 1.5 Bn

• 50Bn

• lt 2M Households reached

• 500M un-served poor

Improve access

• 60 of MF services in South

• Several un-served areas

• Largely urban

• Mostly rural

• Range of risks to be covered

• Limited non-credit services

Increase impact

• Fast growing population and overall economy

• Missing market linkages / employment opportunities

Including loans against gold
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Constraints overcome those challenges?

• Information Asymmetry
• No collateral
• No credit history
• Difficult to evaluate enterprises potential
  success

• High Costs of Intermediation
• Low value transactions
• Geographical isolation
• High supervision costs (no financial literacy)
• Informal activities need flexible access
• Illiteracy traditional services inappropriate
• High cash handling costs

Difficult risk assessment High transaction costs
How to release these constraints?
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Thus the need for institutions building
Finance

• Venture capital for start ups
• Cheaper cost of funds for on lending

Systems

• Product development
• Technology platform
• Clients authentication by unique ID

• Staff Skills strengthening / Training
• Recruiting of professionals
• MFI Entrepreneurs development

Capacities
Research

• Assess and Increase impact on poverty alleviation
• Experiment and improve products

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Agenda

• Microfinance in India an overview
• The Centre for Micro Finance
• Research Unit
• MFI Strategy Unit

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CMFs objectives and mission

• Established in 2005
• CMFs objectives
• To address knowledge gaps in micro finance sector
• Experiment on ground solutions
• CMFs mission
• Systematically research links between access to
  financial services and participation of poor in
  larger economy
• Participate in maximizing access to financial
  services

Research on micro finance and livelihood
financing (RU)
Strategy building for MFIs (MSU)
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CMFs Objectives
Training
Research
Influence practice
Advocacy
Strategy building
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MSU and RU re-enforcement loop

• MFIs Strategy for growth
• Definition and implementation of innovative
  business models
• Market research, creation of linkages
• MFIS best practices sharing
• Design/test of new financial products
• Capacity building
• capital structure, HR, MIS, processes, customer
  segmentation, governance

Strategy (MSU)

• Impact of microfinance
• Impact Evaluation Studies
• Economics of micro enterprise
• Insights on HH "financial behavior"
• Constraints on HH productivity
• Experimentation on product design
• Micro finance transaction costs

Research (RU)
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CMF collaborates with existing active players in
the microfinance sector
MFIs/NGOs/Trust
Banks/Financial Institutions
Universities/ Research Institutions
SMEs
CDF
CMF
Insurance Companies
Manufacturing Companies
CIRM
CAFS
Funding Organizations
Regulators/ Policy Makers
Government (Central and State)
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Agenda

• Microfinance in India an overview
• The Centre for Micro Finance
• Research Unit
• MFI Strategy Unit

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Goals of Research is to maximize microfinance
impact through 3 axes

• Why are recovery rates so high?
• What is the financial behavior of clients?
• What is the impact of microfinance?

Understand better

• Improve organizations
• Information management
• Role of HR policy and staff incentives
• More cost-effective processes

Expand access

• Alternative channels
• SHGs
• Revive RRBs
• New channels (Kiosks, ATM, CF)

• Policy
• Regulation
• Competition and information sharing

• New and innovative products
• Maximize the impact of credit through other
  services

Improve quality of services
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These objectives translate into 4 Research areas
to maximize microfinance impact
1
2
Impact and product design
Microfinance plus
Maximize impact On client
4
3
Finance and Organizational issues
Policy
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Impact and experimentation
1
Impact
Experimentation

• Micro-credit has been changing people's lives
  and revitalizing communities
• UN, 2005, Year of micro-credit

The full promise of microfinance can only be
realised by returning to the early commitments to
experimentation, innovation and evaluation
Morduch
1999
Can we put numbers on this claim? Are there more
cost-effective ways to achieve this goal?
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Product design credit
1
Selection
Monitoring
Enforcement

• Individual/group liability
• Self/MFI selection
• Guarantors
• Collaterals
• Interest rate

• Repayment schedule
• Communication strategies
• Loan size
• Interest rate

• Within group monitoring
• Staff supervision

Design the most cost-effective products by
varying credit product components
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1
Product diversification and communication
strategies

• Insurance
• Weather
• Life and Health
• Livestock

• Flexible loans
• Small initial sizes
• Larger subsequent loans
• Longer terms

Savings
What do low income clients want?

• Housing loans
• Build new homes
• Improve existing homes

• Group based
• Individual loans

Remittances products
Which delivery channels/communication strategies
are effective?
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Improve communication strategies
1

• How do households face shocks and risk?
• What drives savings and credit behavior?
• Why do people default (and why dont they)?
• Why dont households adopt the most profitable
  activities?
• Why dont people adopt useful financial services?

Design the most effective communication strategies
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Microfinance Plus address contextual constraints
2
inputs
infrastructure
Impact
Access to Financial services
?
Health
entrepreneurship

• Reduce risks of MFIs by combining microfinance
  with other
• development interventions (health, financial
  training)
• Provide products / services through credit

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Organizational issues cost and profitability
3
Transaction?
Bank
Micro-loan
9
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Return?

• How to reduce transaction costs?
• Show investors risk return performance of
  micro-loans

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Organizational and financial issues
3
Information management
Organizational structure

• What is the debt capacity of clients? Can they
  absorb higher loan sizes?
• How can MFIs analyze better their clients debt
  capacity and capacity to repay?
• Role of MIS in info management

• What organizational improvements will help MFIs
  to sustain themselves and to grow faster?
• What is effect of HR policies (ex, staff
  incentives)

Processes
Financing

• How can MFIs make their business processes more
  efficient activity-based costing
• What are the flows and successes during the
  implementation of the intervention?
• How to improve project implementation?

• How to secure financing for MFIs?
• Start up capital
• Long-term loans
• Can securitization help access cheaper financing
  for MFIs and how can it be done?

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Policy issues
4

• What are regulatory obstacles to MFIs?
• What are the consequences of competition and how
  to manage it?
• Why is there no information sharing? How can a
  credit bureau be set up?
• How to make MFIs more transparent?
• How to improve microfinance reputation?

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Research projects examples

• Effect of smokeless
• Chulhas in Gram Vikas,
• Orissa
• Impact of treated
• bed-nets provided through
• Credit in Orissa
• Delivering Nutrition
• supplements through
• Microfinance groups

• Impact of micro-credit
• In Spandana, Hyderabad
• Experiment on repayment
• schedules in VWS, Kolkota
• and KAS, Orissa
• Impact of weather
• Insurance and willingness
• to pay

Impact and product design
Microfinance plus
Maximize impact On client
Finance and Organizational issues
Policy

• Effect of staff incentives
• Transaction costs break-up in MFIs
• Activity based costing
• For MFIs

• Credit information
• Sharing in India
• Regulatory impediments
• For micro finance

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Research other initiatives
Panel database

• Construction of a panel database in Tamil Nadu
  for on-going research
• With Yale Center for Economic growth (Mark
  Rosenzweig, Dean Karlan, Chris Udry, Paul
  Schultz, Rohini Pande)
• 10,000 households in Tamil Nadu, rural and urban,
  every 4 years
• Study vulnerability, consumption patterns over
  time
• Document migration patterns, access to financial
  services over time

Seminar series

• Academics and practitioners
• Foregone seminars
• Prof Ashok Jhunjhunwala, IIT Chennai
• Prof Vaidyanathan, Madras Institute of
  Development studies
• Prof Sendhil Mullainathan, Harvard
• GN Bajpai, ex chairman of SEBI
• Shekhar Shah, World Bank

Courses

• Economics of micro finance, by Adel Varghese,
  Texas University
• Evaluating social programs, by Poverty Action Lab
• MBA course elective on microfinance, by Rock Rock
  Magleby-Lambert, Boston University
• Total immersion program in Finance and development

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Agenda

• Microfinance in India an overview
• The Centre for Micro Finance
• Research Unit
• MFI Strategy Unit

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MSU Objectives and areas of work

• Advice MFIs to define and execute a growth
  strategy by addressing their main challenges
• Horizontal growth (Same Products Same Customers
  Profile)
• Vertical growth (New Products /or New Customers
  Profile)

Support MFIs growth (vertical horizontal)
Refine Business strategy and model
Improve internal Organizational structure
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MSU Areas of work with MFIs
Business strategy
Organizational structure
1

• 3y strategic plan definition
• Competitive position assessment (SWOT analysis)
• Marketing strategy
• Customer segments to target
• Products to develop to serve these segments (IL,
  insurance)
• Portfolio management
• Market linkages creation
• Leverage of ICICI MFIs and corporations clients
• Thematic consultations

• Capital structure (equity/debt) and access to
  financial markets (VC, securitization)
• HR recruiting, training, incentives
• Organizational design
• MIS
• Processes of operations
• Governance

2
3
4
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Reduction of MFIs cost of funds Supply-demand
match assessment
1
Supply
Demand
Identify potential assets to securitize/buy out
Evaluate investors risk/return appetite for
MFIs paper
Check demand / supply requirements match
Facilitate / structure the deal
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4 options to explore and 4 types of players to
interview to reduce MFIs costs of funds
1
Portfolio Securitization
Bond issue
Portfolio Buyout
Direct medium/long term loan
Foreign banks

• Minimum volume of investment?
• Investment currency and hedging mechanism?
• Tenure / maturity of investment?
• Pooled vs single MFI portfolio investment?
• Investor risk/return profile?
• Portfolio / MFI rating requirement?
• Guaranty requirement (FLDG/SLDG)?
• Investment seasonality (PSL requirement)?
• Investor reporting / monitoring requirements?
• Willingness / capacity of the MFIs to receive
  funds and comply with investors requirements?

Domestic banks
Funds
Facilitator
Impact on MFIs CoF?
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HR training, recruiting, incentives
2
Potential partners
Organizational structure

• MFIs careers, Hunt Third sector
• Awareness program

• Recruitment facilitate recruitment for the
  entire sector in the next 3-5 y gt 20K FTEs to
  hire (TBD)
• Financial training for top mngt
• Training for middle mngt field staff
• Incentive schemes

• IFMR centers (CAFS, insurance)
• ICICI trainings
• HBS, Duke, IIM

• Coordinate existing providers
• MicroSave, Care India, Basix school of
  livelihood, EDA
• Set up new facilities (if required)

• Cocoon?

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Training / capacity building for MFIs questions
to be answered
2

• Identify prioritize immediate and recurring
  training needs at top/middle management levels
  and field staff for top 10 MFIs
• Market review (cost, location, duration) of the
  existing facilities in India (Priority1) and
  internationally (Priority2)
• Identify gaps for supply to match demand gt use
  MicroSave (CMF partner) study as a starting point
• Set up new entities to fill these gaps (if
  necessary)
• Explore funding solutions for MFIs to be trained
• gt Interactions with top 10 MFIs , mainly CEO
  and HR director
• gt Interviews of main training institutions and
  financial universities in India and abroad (HBS)

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MIS partnership with FINO
3

• To develop a common end to end delivery platform
  shared across Indian MFIs
• Created as sectoral resource to serve 700M
  customers

Objective
Benefits for MFIs

• To reduce initial CAPEX required per MFI
• To improve product depth and capability
• To improve business management and reduce
  transaction costs
• data reliability and timeliness (product,
  clients)
• To better service liabilities and investments
• To allow single-window monitoring of customer
  relationships

• To access reliable data on MFIs operations
  performance
• Easier portfolio rating through creation of
  historical data

Benefits for investors
Current status

• Currently sized for 12-50M customers
• Proof of concepts completed, final contract
  negotiations (IBM/iflex)
• Entire infrastructure, hosting, operations
  outsourced
• First phase launch with 5 partners by May 2006

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Market linkage creation approach
4
Corporates
ICICI Commercial teams

• Product to be sourced (retailed)?
• Region? Volume? Price? Quality?
• Required investments (capital or capabilities)
  for tie up?
• Expected return (in value)?
• Timeframe of return?
• Risk undertaken by company (quality)?
• Previous pilot already undertaken?

Demand
Market dynamics
ICICI Sectoral team
Sectoral experts / NGOs
MFI
Customers
Supply

• Local presence in identified region?
• Willingness/Capacity of MFI to
• Provide customized financial products?
• Identify entrepreneurs (if necessary)?
• Provide/coordinate technical training at the
  field level?

• Volume generated (absorbed)?
• Quality?
• Cost of production?
• Capacity to contract payback loan?
• Existing capabilities/training need?

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4
Market linkage example cattle feed distribution
through Godrej Agrovet-Spandana (1/2)

• Dairy activity is a low revenue activity for
  farmers in spite of a growing milk demand and
  therefore remains a marginal source income
• Milk yields from buffaloes is low because these
  are not fed good quality feed
• Farmers perceive dairying as a subsidiary
  activity because it only offers marginal income
  they have no incentive to own more that 1 or 2
  buffaloes
• Farmers however willing to invest in dairy
  (cattle feed, high quality breeds, artificial
  insemination) often lack the funds to do so
• Godrej Agrovet, a concentrate cattle feed
  producer, is not presence in the areas where
  Spandana (MFI with 700,000 clients) operates.

Initial Situation
Objective

• To increase farmers revenues from milk production
  through improved yield and quality of milk
  produced by cattle feed utilization
• To reduce the risk on Spandanas loans that go
  toward buffalo purchase

Challenges

• Marketing the feed product to traditional / low
  income farmers and educating them to utilization
  of such product
• Designing a credit product that caters to the
  clients needs

Expected Impact

• Expected net revenue increase in Guntur
• 300-600Rs/month/household with a single buffalo
  fed with cattle feed
• up to 2400Rs/month, ie. by 34, once households
  scale up to 4 buffalo after demonstration effect
  on one buffalo

average monthly household income of 60
families surveyed was 7000Rs
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Market linkage example cattle feed distribution
through Godrej Agrovet-Spandana (2/2)
4
Godrej Agrovet

• Delivers concentrate feed in 50 kg bags to
  central locations from where Spandana receives
  the product
• Region Guntur
• Price 325Rs/50 Kg
• Has assigned 2 officers to coordinate project

Demand
Spandana
Customers

• Provide credit at 0 int. rate for the purchase
  of feed
• Delivers the product to weekly center meeting
• Has assigned 1 project leader
• Does not make any profit out of this initiative

• Increase yields and fat
• Increase income by 10-20 Rs/day
• Are offered doorstep delivery
• Are able to purchase the feed on credit at 0

Supply
37
Godrej Agrovet-Spandana productivity improvement
4
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Godrej Agrovet-Spandana productivity improvement
4
After Spandana-Godrej partnerships
Details
Godrej
1
1
Spandana buys cattle feed in bulk at distributors
price (premium for delivery costs)
Cattle feed
Piloted
Spandana
2
Spandana provides a 0 loan for farmers to buy
cattle feed delivered at village level and farmer
pays back according to seasonality
Loan
2
Cattle feed
Farmer
Sales
3
3
Milk
Spandana supports a chiller set up by providing a
loan to a local entrepreneur
Loan
Chiller Entrp.
Spandana
To be piloted
Sales
4
4
The entrepreneur pays back his loan through
direct sales to the dairy
Dairy
Results

• Pilot on 300 women for 5 months
• Milk production increases by 50 (from 2L to 3L)
• Increased net revenue for the farmer2200 INR
  per month(4 buffaloes)
• Spandana provides buffalo loan for farmer to take
  up milk production

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Market linkage example Mint cropping (1/2)
4

• Traditional crops are being produced in the
  Eastern Uttar Pradesh by low-income clients of
  one of the top 10 MFIs.
• Mentha cultivation is not done at the commercial
  level although it is feasible.
• Mint production company is trying to secure it
  raw material sourcing to serve a growing demand

Current Situation
Objective

• Encourage and provide opportunity to the low
  income clients (having cultivable land) to grow
  mentha (Commercial)
• Link procuring company to the low income clients
  directly
• Organize producers in a commercial venture

• Business model needs to be downscaled initially
  (low profit for the Company)
• Financing the Distillation Unit (Rs 22-25 K)
• Solving logistics (extension support) and pilot
  project funding issues

Challenges
Expected Impact

• Enhanced returns through the mint cropping (Rs
  21K /Acre) as compared to Rice (Rs 10K/Acre) and
  Wheat (Rs 8.4 K/Acre).

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Market linkage example Mint cropping (2/2)
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Mint Procurement Companies Requirement

• Product Good quality Mentha arvensis.
• Region Eastern Uttar Pradesh
• Price At Prevailing market rates (Rs 450- Rs
  750/ Litre Mentha oil).
• Scale of Operation Aggregated produce from 15
  Acres Bigha land.
• Tie-up with mint firms for procurement through
  their local offices.
• Risk Crop failure due to water logging
  (Weather/Crop Insurance) and the demand
  fluctuations.

Demand
MFIs Role
Customers Role

• Plant Mint yielding 55-60 Kg/Acre and can be
  harvested twice in 7-8 months.
• Proper irrigation and timely crop management.
• Shift from Wheat (Traditional) ? Mint
  (Commercial).
• Invest (financed from MFI) Rs 22K- 25K for the
  Distillation Unit (Collectively owned) and raw
  materials.

• Identify client on the basis of land availability
  in the selected districts.
• Finance Distillation Unit (Cost Rs. 20K-22K) and
  raw materials.
• Design package loan covering the credit and
  insurance needs.

Supply
41
4
Market linkage creation other projects

• Handicraft
• Fisheries / Seaweed
• Trees plantation
• Food processing
• Vegetables / Mint cropping

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Thank you

• For any question
• annie_at_ifmr.ac.in or sdjari_at_ifmr.ac.in

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Constraints to scaling access for the poor

• Information Asymmetry
• No collateral
• No credit history
• Difficult to evaluate enterprises potential
  success

• High Costs of Intermediation
• Low value transactions
• Geographical isolation
• High supervision costs (no financial literacy)
• Informal activities need flexible access
• Illiteracy traditional services inappropriate
• High cash handling costs

High transaction costs
Provision of microfinance is constrained by
Poor Technology
Regulatory Issues
Staff Incentives not aligned to maximise access
to financial services for poor
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How to release these constraints?

• To improve impact of microfinance on the poor
• To increase access to the relevant suite of
  financial services

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CMF Who are we?

• Permanent staff 23 Research associates and 8 MSU
  Associates from Kennedy School, Yale, IFMR, XIMB,
  IRMA
• Short-term Interns Masters and Phd students from
  Kennedy School, Harvard, Yale, MIT, DSE etc.
• Research Committee to give advice on submitted
  proposals
• Jonathan Morduch (NYU), Abhijit Banerjee (MIT),
  Byomkesh (SKS), Mr. Thiagarajan (MCFI),
  Chandrasekar (IFMR), Bindu Ananth (CMFR founder)

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CMFs Objectives
Training
Research
Influence practice
Advocacy
Strategy building